Saturday 19 May 2012

Affording that first, dream home

By Jessica Cheam, The Straits Times, 18 May 2012

Is the dream of home ownership still within the reach of young people in Singapore?

THERE'S nothing quite like the subject of property to get the average Singaporean excited. Discussions on home prices, movements of the property market, unit sizes and even interior decoration dominate all manner of daily conversations, from Parliament debates to coffee shop talk.

Singapore is a home-owning, house-proud nation. This has its roots in a decision made by the first generation of leaders more than 50 years ago - when Singapore gained self-governance - who saw the value of home ownership.

Former prime minister Lee Kuan Yew, for example, saw it as a way to create a sense of national belonging in a volatile era, when the country was coming to terms with self-governance and later, independence.

Mr Lee wrote in his 2000 memoirs that it was important for Singaporeans to own their homes: 'I believed this sense of ownership was vital for our new society, which had no deep roots in a common historical experience.'

Over the past five decades, the Housing Board has been the cornerstone of that fundamental philosophy. The HDB was established on Feb 1, 1960 - shortly after Singapore gained self-governance in 1959, and amid a housing crisis. Then, much of the population was living in crowded squatter settlements and unhealthy conditions.

The HDB, taking over from its predecessor, the Singapore Improvement Trust, was tasked with housing the entire nation. It built 21,000 flats in under three years. By 1965, when Singapore gained independence, it had built 54,000 flats. Within 10 years of its formation, it had the housing problem under control.

Today, it has built more than one million flats, housing over 80 per cent of Singapore's residents.

The homes have become a social safety net, an asset that has become a hedge against inflation and a store of retirement income for home owners.

In Singapore, about 88 per cent of households own their homes, with most owning HDB homes. This is a notable achievement for a city once overrun by slums. In comparison, rival city Hong Kong's figure is much lower, at about 52 per cent.

Singapore's public housing policies and projects have also gained international recognition. In 2010, the HDB was awarded the 2010 United Nations-Habitat Scroll of Honour Award, the most prestigious award of its kind, which recognised the housing board for 'providing one of Asia's and the world's greenest, cleanest and most socially conscious housing programmes'.

But as successful as HDB has been in the past, other more complex issues have surfaced in recent years that have prompted a national discussion and review of current housing policies.

In last year's General Election, housing emerged as one of the hottest topics, with the public voicing strong opinions over the affordability of homes, particularly for newly-wed, first-time home buyers.

Singapore's property bull run of the past five years - bolstered by the country's strong economic growth - had seen private and public housing prices soar to historic highs.

Home buyers were unhappy about either being priced out of the HDB resale market or repeated failure in balloting for a new flat from the HDB.

The question that young home buyers were asking was: How can we afford that first, dream home?

Well, the good news is that homes are still affordable - depending on what you are aiming for.

The Government's promise - and the HDB's mission - is to provide affordable housing for the masses.

Newly-weds earning below $10,000 in combined monthly income can apply for the HDB's new Build-To-Order (BTO) flats, which are typically priced around 30 per cent cheaper than comparable resale flats in the same area.

The income ceiling was recently raised from $8,000 to $10,000 to enable a larger number of buyers to purchase flats directly from the HDB. The move was seen to help in drawing demand away from the red-hot resale market.

The HDB has in the past year launched new projects at least once every two months across a wide range of locations. BTO flats, however, take around three years to be built - so young buyers have to be prepared to wait for their home.

Prices of new BTO flats have been kept stable in the past year, and are generally affordable for young couples, going by widely used standards.

The internationally recognised threshold for housing affordability is a 30 per cent 'debt-to-service ratio' (DSR) - the proportion of monthly income that goes into paying the mortgage. (See box for a worked example.)

Another widely used affordability measure divides the price of a home by a potential buyer's annual income.

The affordability picture changes if the couple opt for a resale HDB flat instead.

The Government does not control prices of HDB resale flats, which reflect market demand and supply. Many resale flats are in mature estates with many amenities, and in locations more central than new flats. The result: Most HDB resale flats are more expensive than new flats.

Buyers of resale flats also need more cash reserves to pay for their homes, as sellers typically demand a cash premium - called cash-over-valuation - over and above a flat's valuation.

According to the HDB's latest figures, the median price of a four-room resale flat ranges from $384,000 in Yishun to $655,000 in Queenstown.

First-time buyers have to do their sums carefully to determine if they can afford it. If the couple can qualify for an HDB loan, the upfront payment needed will be 10 per cent; for those who do not qualify and have to get private bank loans, the upfront payment is a heftier 20 per cent.

For a $655,000 flat, this is $65,500 or $131,000 respectively, which can be paid in cash or with one's Central Provident Fund.

Those who have just joined the workforce would have to work for several years before they can come up with those kinds of savings. Those earning below $5,000 monthly will also find that their DSR will shoot past 30 per cent (explained in the worked example) if they set their sights on pricey resale homes.

Those with loftier ambitions of getting into the private property market after working for a few years might need a further reality check.

Latest figures from the Singapore Real Estate Exchange (SRX), which collects price data, shows that the average per square foot price of a non-landed private home is $1,061 for the first quarter of this year.

This means a three-bedroom condominium unit of, say, 1,000 sq ft will cost about $1 million, of which about $200,000 is needed upfront.

It is no wonder that parents often advise their children to start with a new HDB flat. You need to live in it for at least five years before it can be sold or rented out.

Existing housing policies favour the family unit - only married couples are allowed to buy new flats from the HDB or qualify for grants. Singles cannot buy new flats directly, and have to be above 35 years of age to purchase HDB resale flats.

For young buyers who are neither married nor have a fat bank account as yet, there are other options to consider. They can live with their parents or other family members, or rent a place.

More may be doing so: Figures from the 2010 Population Census show a rise in the proportion of one-person resident households in the 25 to 29 age group, from 10 per cent in 2000 to 28 per cent in 2010.

Such an option might cost more, but offers more flexibility on flat type and location, as well as the freedom and independence that many young people desire today.

Ultimately, the path to your dream home can be achieved in several ways. Arming yourself with intimate knowledge of the property market, housing policies and financing options is the first step to getting that first dream home.

Can you afford a new home?

LET'S look at HDB's recent launch of subsidised new flats at Ping Yi Greens in Bedok as an example.

A three-room flat is priced between $281,000 and $317,000, and a four-room from $400,000 to $464,000.

Based on a total monthly income of, say, $3,600, a young couple can get an additional housing grant of $15,000 for a $300,000 three-room home.

This means a net purchase price of $285,000. With an HDB loan of 90 per cent of that price, or $256,500, and at the current interest rate of 2.6 per cent, their monthly instalment repayment will be about $1,020 based on a 30-year loan.

This works out to a 'debt-to-service ratio' (DSR) of 28 per cent - which means 28 per cent of their monthly income goes to paying the mortgage. The internationally recognised threshold for housing affordability is about 30 per cent.

So the three-room flat is relatively affordable for a couple in that income range.

A couple with higher monthly incomes can go for bigger flat types.

Take a couple earning, say, $5,800 monthly. The monthly instalment on a four-room flat of $430,000 - with an HDB loan of 90 per cent of the purchase price at the current interest rate of 2.6 per cent for 30 years - would work out to $1,549 or 27 per cent of monthly income.

Housing policies at a glance


Under government policies, first-time home buyers who form a family nucleus can buy a new, subsidised flat directly from the Housing Board.

Those who choose to buy a resale HDB flat can qualify for a housing grant of up to $40,000.

You must be at least 21 years old, a Singapore citizen, and your family nucleus must comprise at least another Singapore citizen or Singapore permanent resident.

This person could be:
- Your spouse, and children (if any) 
- Your parents, and siblings (if any) 
- Your children under your legal custody, care and control (for a widowed/ divorced person) 
- Your fiance/fiancee 
- Your unmarried siblings (if you and your siblings are orphans)
Your average gross monthly household income must not exceed $10,000. This ceiling is lower for two- or three-room flat types.


Some other housing options include homes under the HDB's Design, Build and Sell Scheme (DBSS) and executive condominiums. Both schemes were meant to cater to the 'sandwich class' of middle-income buyers who aspire towards private condo-style living but cannot afford the prices.

DBSS projects are built by private developers but have HDB rules.

Units have condo-like furnishings but the blocks are ungated, like normal HDB blocks, with no perimeter or security guards as in private estates.

Land sales for such projects have been suspended for the time being following a public outcry over a Centrale 8 DBSS unit in Tampines bearing an original price tag of $880,000 last year.

Couples earning between $8,000 and $10,000 can buy new DBSS flats with a $30,000 Central Provident Fund housing grant.


Executive condos (ECs) are built by private developers and boast features found in private estates such as swimming pools and tennis courts.

The government imposes conditions on those who want to buy EC units. The monthly household income of a couple applying for an EC unit must not exceed $12,000, and they must occupy the apartment for at least five years before they can sell it on the open market or rent it out.

After 10 years, the units are converted into private housing and can be sold to foreigners.

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